Cash Ratio Formula is a powerful tool for traders in the Forex market. It allows traders to identify a range of liquidity opportunities as well as gauging the stability of the Forex market. In this article, we’ ll discuss what the Cash Ratio Formula is, how it works, and how it can be used to identify trading opportunities.
What Is The Cash Ratio Formula?
The cash ratio formula is a standard metric used to measure the amount of cash available to cover short-term debts. It is typically expressed as a percentage and calculated by dividing the amount of cash and marketable securities by current liabilities. This ratio shows how much of the current liabilities of a company can be covered by its liquid assets. The higher the ratio, the greater the company’s ability to cover its short-term debts.
What Are The Benefits Of Using The Cash Ratio Formula?
Using the cash ratio formula gives companies a better understanding of the current liquidity of their assets and liabilities. This knowledge can help them make better strategic decisions about acquiring additional debt or investing in long-term ventures. Additionally, the cash ratio is useful for comparison purposes when evaluating different businesses. Comparing the cash ratio of a company to the industry average can provide valuable insight into their financial health relative to their competition.
How To Calculate The Cash Ratio
The cash ratio formula is easy to calculate. First, determine the short-term liabilities of the company, which includes accounts payable, wages, taxes and interest due. Then, calculate the current assets, which includes cash, marketable securities, inventory and accounts receivable. Divide the current assets by the short-term liabilities for the cash ratio.
For instance, a company with $500 in cash, $400 in marketable securities, $800 in accounts receivable and $200 in short-term liabilities would have a cash ratio of 5.0 ($500 + $400) / $200. This implies that the company has enough liquid assets to pay five times their short-term liabilities.
The cash ratio is an important metric for understanding a company’s financial health, providing insight into their ability to cover short-term liabilities. It can also be used for comparison purposes when evaluating a company’s financial strength relative to industry averages. By calculating the cash ratio, companies can gain important insight that can help inform strategic decisions.